‘Undervalued' FCCBs!

Here's an interesting note that calls attention to the FCCBs (foreign currency convertible bonds) of Indian companies. BNP Paribas Securities India points out in a research note that some Indian FCCBs seem significantly undervalued, and hence, could generate significant capital appreciation. “We would particularly draw attention to the FCCBs of Reliance Communications, Suzlon Energy, JP Associates, Videocon Industries, Rolta India, Great Offshore. The bond market seems to be discounting a situation where these companies would default on their FCCB repayment commitments or force bondholders to accept significant principal haircut. While such possibilities could arise for some companies, we believe that a majority of these companies are not potential defaulters” says the firm's India Market Outlook.

Isn't that playing with fire? “The advantage of investing in a convertible bond is the principal protection it offers – only exception of course, is in case of bankruptcy. However, a defaulting company loses access to international capital markets. Most companies therefore, foresee liquidity problems and restructure their CBs in return for more favourable terms to bondholders, such as higher coupon payments”, reasons BNP Paribas.